New security concerns won't raise nitrogen fertilizer costs

Elton Robinson Farm Press Editorial Staff | Oct 19, 2001

Beefing up security along the fertilizer supply chain since the Sept. 11 World Trade Center and Pentagon attacks will have little impact on fertilizer prices, according to the director of government relations for The Fertilizer Institute.

But market forces, well, that's different.

For example, the perception of short supplies this time last year “had energy buyers wringing their hands about what to do when natural gas, which is used to produce nitrogen fertilizers such as anhydrous ammonia, hit $4 MmBtu (million Btu),” said Everett Zillinger, with TFI, a trade association representing the commercial fertilizer industry.

“It blew by $4 in the blink of an eye on the way to $10. We immediately shut down production.”

By early January, the U.S. fertilizer industry hovered around 45 percent of capacity. Plants were shut down and people laid off. Gas prices were still high, in the range of $5 to $7.

“Our industry was very nervous,” said Zillinger, who spoke at the recent Southern Soil Fertility Conference in Memphis. “So our industry council got together and gave us a policy to focus on as lobbyists.”

TFI's major worry is the tightening competition for natural gas, according to Zillinger. “Over the next 20 years, the U.S. Department of Energy estimates, there's going to be a 33 percent increase in oil demand, a 43 percent increase in electricity demand and a 62 percent increase in natural gas demand.”

To meet electricity demand, “there are 1,400 new power plants on the drawing board right now and 92 percent of them will be natural gas-fired, primarily due to the Clean Air Act.

“Natural gas is viewed by policymakers as the clean energy source,” explained Kathy Mathers with TFI. “It's being used in place of coal in many instances to generate electricity. Natural gas demand used to be seasonal. When it got cold in the winter, we had high demand. Now there's a year-round demand.”

“In the future, it's going to be extremely difficult for U.S. nitrogen producers to compete with power production for supplies of natural gas,” Zillinger said.

Zillinger said that the fertilizer industry currently uses about 3 percent of the natural gas produced in the United States. The cost of natural gas is roughly 70 to 90 percent of the cost of production of 1 ton of anhydrous ammonia. “So by far, it is our major feed stock in the nitrogen industry.”

Where's the increase in electricity demand coming from? Look no further than your computer, according to Zillinger. “Currently about 8 to 13 percent of the electricity used in the United States powers computers and use of the Internet. If the Internet stays on its current growth cycle, the DOE says, the United States will need 2,000 new power plants and 90 percent of those will be fueled with natural gas.”

TFI is trying to convince Congress to push for more natural gas production and exploration and to clear the way for alternative-fuel usage. “Current reserves the industry has been tapping since World War II are going flat,” Zillinger said. “We need new areas, new fields and new sources. And we need to eliminate disincentives for coal, oil and nuclear power for electricity production.”

TFI is also asking Congress to consider increasing natural gas pipeline capacity. “We have only three or four natural gas pipelines in the country. If any one of those goes down, that impacts the price.”

On the positive side, President Bush's new energy policy includes incentives for more oil and natural gas exploration and production. On the other hand, the environmental lobby is still very influential, noted Zillinger. “So far they've thrown up roadblocks for drilling off shore, where much of the untapped gas reserves are located.”

Increased security

Security is now a major issue for the fertilizer industry, a trend which began after the Oklahoma City bombing and the first World Trade Center bombing.

“The industry fully recognizes that our products can be used and misused and adulterated for evil intent,” Zillinger said.

In the Oklahoma City bombing, ammonium nitrate was adulterated, placed in barrels in a rental truck and detonated in front of the Murrah Federal Building, killing hundreds. In the first World Trade Center bombing, the deadly bomb was constructed from adulterated urea.

In addition, illegal drug makers often steal anhydrous ammonia from farm storage tanks to make methamphetamines, a highly addictive drug which affects the nervous system in humans.

Zillinger noted that on Sept. 21, 10 days after the attack on the World Trade Center, the largest fertilizer plant in France had a catastrophic explosion which wiped out part of the town of Toulouse, destroyed or damaged thousands of homes and killed 29 people.

First reports declared that the blast was an accident, but since then investigators have opened a new probe into possible terrorism. A man found dead at the blast was known by police to have Islamic fundamentalist sympathies and was involved in altercations at the plant with workers who were displaying the U.S. flag in sympathy for the Sept. 11 attacks.

The body of the man, a French national born in Tunisia, was found dressed in several layers of clothing, which appeared suspicious to investigators. He was hired by a subcontractor five days before the explosion.

“This tells our industry that we need to do a more thorough job of evaluating everything and everyone — subcontractors, people we hire, drivers. It's a huge challenge for us, and we've only begun to look at the issue,” Zillinger said.

Transportation security is also worrisome, noted Zillinger. “Our products are moving everywhere all the time. After the events of Sept. 11, we've had hazardous material driver checks in various states, and the Coast Guard has issued warnings for port facilities and focused a lot of attention on large fertilizer cargo ships.”

In addition, there has been increased security for barge, rails and trucks, terminals, storage facilities and pipeline security for about 1,500 miles of underground and aboveground ammonium pipeline. “Security for that was rarely an issue, especially prior to Sept. 11.”

At the customer level, the TFI implemented its Be Aware/Be Secure for America promotional effort to heighten customer awareness of potential illegal use of fertilizer products.

The principles of the campaign are: know your customer, protect your product and make the right call. The latter refers to reporting any suspicious activity to the Bureau of Alcohol and Firearms, at 800-800-3855.

But it may take more, according to Zillinger. “The FBI and other agencies are now beginning to tell us we may need to start looking at background checks, retail certification, restricted use on some products and potentially the ban of sale of certain products.”

Beefed up security will add costs. But the fertilizer industry shares one dubious marketing distinction with farmers, the inability to pass on costs to the consumer.

“Our product is a commodity,” said Zillinger. “It's difficult if not impossible for us to build in extra costs. We're just like a wheat farmer in Kansas. It doesn't matter what the combine costs. If you're getting $2 a bushel, that's what you get. The only thing that affects our price is the market.”